C. BUSINESS COMBINATIONS

As part of our strategy to expand our portfolio, in August 2015, we acquired CBR and in November 2014, we acquired Lumara Health and its product Makena. In addition, in June 2013, we entered into a license agreement (the “MuGard License Agreement”) with Abeona Therapeutics, Inc. (“Abeona”) (formerly known as PlasmaTech Biopharmaceuticals, Inc. and Access Pharmaceuticals, Inc.) pursuant to which we acquired the U.S. commercial rights to MuGard for the management of oral mucositis and stomatitis (the “MuGard Rights”).

CBR Acquisition

On August 17, 2015 (the “CBR Acquisition Date”), we acquired CBR from CBR Acquisition Holdings Corp. for $700.0 million in cash consideration, subject to estimated working capital, indebtedness and other adjustments. We believe CBR is a strong strategic fit for our growing business and offers a unique opportunity to reach a broader population of expectant mothers who may benefit from our product offerings in the maternal health space, including Makena.

We accounted for the acquisition of CBR as a business combination using the acquisition method of accounting. Under the acquisition method of accounting, the total purchase price of an acquisition is allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the date of acquisition. We have made a preliminary allocation of the purchase price to the net tangible and intangible assets acquired and liabilities assumed, based on available information and various assumptions we believe are reasonable, with the remaining purchase price recorded as goodwill.

The following table summarizes the components of the total purchase price paid for CBR, as adjusted for the final net working capital, indebtedness and other adjustments (in thousands):



		Total Acquisition
		Date Fair Value
Cash consideration	$	700,000
Estimated working capital, indebtedness and other adjustments		(17,837)
Purchase price paid at closing		682,163
Cash paid on finalization of the net working capital, indebtedness and other adjustments		193
Total purchase price	$	682,356

The following table summarizes the preliminary fair values assigned to the CBR assets acquired and liabilities assumed by us along with the resulting goodwill at the CBR Acquisition Date (in thousands):


	Total Acquisition
	Date Fair Value
Accounts receivable	$	8,660
Inventories		3,825
Prepaid and other current assets		8,360
Restricted cash - short-term		30,752
Property, plant and equipment		29,401
Customer relationships		297,000
Trade name and trademarks		65,000
Favorable lease asset		358
Deferred income tax assets		5,155
Other long-term assets		198
Accounts payable		(2,853)
Accrued expenses		(13,798)
Deferred revenues - short-term		(3,100)
Payable to former CBR shareholders		(37,947)
Deferred income tax liabilities		(149,530)
Other long-term liabilities		(200)
Total estimated identifiable net assets	$	241,281
Goodwill		441,075
Total	$	682,356

Measurement period adjustments recorded in the fourth quarter of 2015, which are reflected in the table above, consisted primarily of reductions to accounts receivable, inventories, prepaid and other current assets and property, plant and equipment totaling $1.9 million and increases to accrued expenses and long-term liabilities totaling $0.5 million, which resulted in an increase to goodwill of $1.8 million, net of $0.6 million of deferred taxes. These measurement period adjustments have been reflected as current period adjustments in the fourth quarter of 2015 in accordance with the guidance in Accounting Standards Update (“ASU”) 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”), which we early adopted in the third quarter of 2015. Any remaining adjustments to the preliminary fair value of these acquired assets and liabilities assumed will be made as soon as practicable but not later than one year from the CBR Acquisition Date.

The gross contractual amount of accounts receivable at the CBR Acquisition Date of $11.7 million was adjusted to its fair value of $8.7 million. The fair value amounts for CBR’s customer relationships, trade names and trademarks were determined based on assumptions that market participants would use in pricing an asset, based on the most advantageous market for the assets (i.e., its highest and best use). We determined the fair value of the customer relationships, using an income approach, which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining life. Some of the more significant assumptions used in the income approach from the perspective of a market participant include the estimated net cash flows for each year for the identifiable intangible asset, the discount rate that measures the risk inherent in each cash flow stream, as well as other factors. The fair value of the trade names and trademarks was determined using the relief from royalty method, which is also an income approach. We believe the fair values assigned to the CBR customer relationships, and the trade names and trademarks are based upon reasonable estimates and assumptions given available facts and circumstances as of the CBR Acquisition Date. If these assets are not successful, sales and profitability may be adversely affected in future periods, and as a result, the value of the assets may become impaired.

The customer relationships will be amortized to selling, general and administrative expenses based on an economic consumption model over an expected useful life of approximately 20 years. The trade names and trademark intangible asset is deemed to be an indefinite-lived asset, which is not amortized but will be subject to periodic assessments of impairment.

Based on the fair value adjustments primarily related to deferred revenue and identifiable intangible assets acquired, we recorded a net deferred tax liability of $144.3 million in our consolidated balance sheet as of December 31, 2015 using a combined federal and state statutory income tax rate of 37%. The net deferred tax liability represents the $149.5 million of deferred tax liabilities recorded in acquisition accounting, primarily related to the fair value adjustments to CBR’s deferred revenue and identifiable intangible assets, offset by $5.2 million of deferred tax assets acquired from CBR. These tax estimates are preliminary and subject to change based on, among other things, any adjustments to management’s determination of the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed by jurisdiction, the deductibility of acquisition-related costs and other costs recorded by CBR prior to the acquisition, and management’s assessment of the combined company’s ability to utilize the future benefits from acquired and legacy deferred tax assets.

We incurred approximately $11.2 million of acquisition-related costs in 2015 related to the CBR acquisition. These costs primarily represented financial advisory fees, legal fees, due diligence and other costs and expenses.

In connection with the CBR acquisition, we incurred a $6.8 million bridge loan commitment fee, which was included in other income (expense) in our 2015 condensed consolidated statement of operations and paid in the third quarter of 2015.

During the post-acquisition period in 2015, CBR generated approximately $24.1 million of revenue. Separate disclosure of CBR’s earnings for the post-acquisition period in 2015 is not practicable due to the integration of CBR’s operations into our business upon acquisition.

Lumara Health Acquisition

On November 12, 2014 (the “Lumara Health Acquisition Date”), we acquired Lumara Health at which time Lumara Health became our wholly-owned subsidiary. By virtue of the acquisition, we acquired Lumara Health’s existing commercial product, Makena. Under the terms of the acquisition agreement, we acquired 100% of the equity ownership of Lumara Health, excluding the assets and liabilities of the Women’s Health Division and certain other assets and liabilities, which were divested by Lumara Health prior to closing, for $600.0 million in cash, subject to certain net working capital and other adjustments, and issued approximately 3.2 million shares of our common stock, having a value of approximately $112.0 million at the time of closing, to the holders of common stock of Lumara Health. The acquisition of Lumara Health provided a strategic commercial entry into the maternal health business. The addition of Lumara Health’s rapidly growing Makena product, the only FDA-approved therapy to reduce the risk of preterm birth in certain at-risk women, added a complementary commercial platform to our portfolio and transformed us into a multi-product specialty pharmaceutical company.

We agreed to pay additional merger consideration, up to a maximum of $350.0 million, based upon the achievement of certain net sales milestones of Makena for the period from December 1, 2014 through December 31, 2019 as follows:

A one-time payment of $100.0 million payable upon achievement of $300.0 million in aggregate net sales in any consecutive 12-month period, commencing in the month following the Lumara Health Acquisition Date (“the First Milestone”); plus

A one-time payment of $100.0 million payable upon achievement of $400.0 million in aggregate net sales in any consecutive 12-month period commencing in the month following the last month in the First Milestone period (the “Second Milestone”); if the Third Milestone payment (described below) has been or is required to be made prior to achieving the Second Milestone, the Second Milestone payment shall be reduced from $100.0 million to $50.0 million; plus

A one-time payment of $50.0 million payable if aggregate net sales equal or exceed $700.0 million in any consecutive 24 calendar month period (which may include the First Milestone period) (the “Third Milestone”); however, no Third Milestone payment will be made if the Second Milestone payment has been or is required to be made in the full amount of $100.0 million; plus

A one-time payment of $100.0 million payable upon achievement of $500.0 million in aggregate net sales in any consecutive 12 month period commencing in the month following the last month in the Second Milestone period (the “Fourth Milestone”); plus

A one-time payment of $50.0 million payable upon achievement of $200.0 million in aggregate net sales in each of the five (5) consecutive calendar years from and including the 2015 calendar year to the 2019 calendar year (the “Fifth Milestone”).

In the event that the conditions to more than one contingent payment are met in any calendar year, any portion of the total amount of contingent payment due in such calendar year in excess of $100.0 million shall be deferred until the next calendar year in which less than $100.0 million in contingent payments is due. This contingent consideration is recorded as a liability and measured at fair value based upon significant unobservable inputs.

The following table summarizes the components of the total purchase price paid for Lumara Health, as adjusted for the final net working capital and other adjustments (in thousands):


	Total Acquisition
	Date Fair Value
Cash consideration	$	600,000
Fair value of AMAG common stock issued		111,964
Fair value of contingent milestone payments		205,000
Estimated working capital and other adjustments		821
Purchase price paid at closing		917,785
Less:
Cash received on finalization of the net working capital and other adjustments		(562)
Cash acquired from Lumara Health		(5,219)
Total purchase price	$	912,004

At the closing, $35.0 million of the cash consideration was contributed to a separate escrow fund (the “Indemnification Escrow”) to secure the former Lumara Health security holders’ obligations to indemnify us for certain matters, including breaches of representations and warranties, covenants included in the Lumara Agreement, payments made by us to dissenting stockholders, specified tax claims, excess parachute claims, and certain claims related to the Women’s Health Division of Lumara Health, which was divested by Lumara Health prior to the closing. The portion of the Indemnification Escrow that has not been reduced by any claims by us and is not subject to any unresolved claims will be released to the former Lumara Health security holders at the earlier of (a) March 15, 2016 or (b) five days after the date on which our audited financial statements for our fiscal year ending December 31, 2015 are filed with the Securities and Exchange Commission.

The fair value of the 3.2 million shares of AMAG common stock was determined based on the closing price of our common stock on the NASDAQ Global Select Market (“NASDAQ”) of $34.88 per share on November 11, 2014, the closing price immediately prior to the closing of the transaction.

The fair value of the contingent milestone payments was determined based on our probability-adjusted discounted cash flows estimated to be realized from the net sales of Makena from December 1, 2014 through December 31, 2019. The cash flows were discounted at a rate of 5%, which we believe is reasonable given the level of certainty of the pay-out.

The following table summarizes the fair values assigned to assets acquired and liabilities assumed by us along with the resulting goodwill at the Lumara Health Acquisition Date, as adjusted for certain measurement period adjustments for Lumara Health recorded during 2015 (in thousands):


	Total Acquisition
	Date Fair Value
Accounts receivable	$	36,852
Inventories		30,300
Prepaid and other current assets		3,322
Deferred income tax assets		102,355
Property and equipment		60
Makena Base Technology		797,100
IPR&D		79,100
Restricted cash - long term		1,997
Other long-term assets		3,412
Accounts payable		(3,807)
Accrued expenses		(36,561)
Deferred income tax liabilities		(295,676)
Other long-term liabilities		(4,563)
Total estimated identifiable net assets	$	713,891
Goodwill		198,113
Total	$	912,004

During 2015, we finalized the fair values assigned to the assets acquired and liabilities assumed by us at the Lumara Health Acquisition Date. The measurement period adjustments recorded in 2015 consisted primarily of a $7.2 million reduction to our Makena revenue reserves and a $5.4 million reduction related to net deferred tax liabilities, partially offset by a $4.5 million increase in the purchase price associated with the final settlement of net working capital with the former stockholders. These measurement period adjustments have been reflected as current period adjustments during 2015 in accordance with the guidance in ASU 2015-16.

The gross contractual amount of accounts receivable at the Lumara Health Acquisition Date was $40.5 million. The $30.3 million fair value of inventories included a fair value step-up adjustment of $26.1 million, which will be amortized and recognized as cost of product sales in our consolidated statements of operations as the related inventories are sold. We recognized $11.6 million and $1.3 million of the fair value adjustment as cost of product sales during the years ended December 31, 2015 and December 31, 2014, respectively. An additional $1.2 million of the fair value adjustment was recognized as research and development expense during the year ended December 31, 2015. The remaining $12.0 million is estimated to be recognized as follows: $4.8 million in 2016, $4.0 million in 2017 and $3.2 million in 2018.

The fair value amounts for the Makena base technology (“Makena Base Technology”) and IPR&D were determined based on assumptions that market participants would use in pricing an asset, based on the most advantageous market for the assets (i.e., its highest and best use). We determined the fair value of the Makena Base Technology and the IPR&D using the income approach. Some of the more significant assumptions used in the income approach for these assets include the estimated net cash flows for each year for each project or product, the discount rate that measures the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, competitive trends impacting the asset and each cash flow stream as well as other factors, including the major risks and uncertainties associated with the timely and successful completion of the IPR&D projects, such as legal and regulatory risk.

The fair value of the acquired IPR&D asset represents the value assigned to acquired research and development projects that, as of the Lumara Health Acquisition Date, had not established technological feasibility and had no alternative future use, including certain programs associated with the Makena next generation development programs to extend the brand franchise beyond the February 2018 exclusivity date, such as new routes of administration, the use of new delivery technologies, as well as reformulation technologies. We believe the fair values assigned to the Makena Base Technology and IPR&D assets are based upon reasonable estimates and assumptions given available facts and circumstances as of the Lumara Health Acquisition Date. If these assets are not successful or successfully developed, sales and profitability may be adversely affected in future periods, and as a result, the value of the assets may become impaired.

Both AMAG and Lumara Health had deferred tax assets for which full valuation allowances were provided in the pre-acquisition financial statements. However, we considered certain of the deferred tax liabilities recorded in acquisition accounting as sources of income to support realization of Lumara Health’s deferred tax assets. We recorded a net deferred tax liability of $193.3 million in our consolidated balance sheet in acquisition accounting using a combined federal and state statutory income tax rate of 38.8%. The net deferred tax liability represents the $295.7 million of deferred tax liabilities recorded in acquisition accounting (primarily related to the fair value adjustments to Lumara Health’s inventories and identifiable intangible assets) offset by $102.4 million of deferred tax assets acquired from Lumara Health which we have determined, are ‘more likely than not’ to be realized. See Note J, “Income Taxes,” for additional information.

We incurred approximately $9.5 million of acquisition-related costs in 2014 related to the acquisition of Lumara Health. These costs primarily represented financial advisory fees, legal fees, due diligence and other costs and expenses.

During the post-acquisition period in fiscal 2014, Lumara Health generated $22.5 million of revenue from sales of Makena. Separate disclosure of Lumara Health’s earnings for the post-acquisition period in fiscal 2014 is not practicable due to the integration of Lumara Health’s operations into our business upon acquisition.

Unaudited Pro Forma Supplemental Information

The following supplemental unaudited pro forma information presents our revenue and net income (loss) on a pro forma combined basis, including CBR and Lumara Health, assuming that the CBR acquisition occurred on January 1, 2014 and that the Lumara Health acquisition occurred on January 1, 2013. For purposes of preparing the following pro forma information, certain items recorded during 2015, such as the $11.2 million of acquisition-related costs, the $10.4 million loss on debt extinguishment, and $9.2 million of other one-time fees and expenses incurred in connection with the CBR acquisition financing, are excluded from 2015 and reflected in 2014. In addition, certain items recorded in 2014, such as the $153.2 million tax benefit and the $9.5 million of acquisition-related costs incurred in connection with the acquisition of Lumara Health, are excluded from 2014 and reflected in 2013. Further, the pro forma combined net income (loss) in fiscal 2013 does not give effect to the elimination of approximately $385.9 million of non-recurring reorganization gains, net of losses and expenses, realized in connection with Lumara Health’s exit from bankruptcy in September 2013 as such amounts are not directly related to the acquisition of Lumara Health. The pro forma amounts do not include any expected cost savings or restructuring actions which may be achievable or may occur subsequent to the acquisition of Lumara Health or CBR, or the impact of any non-recurring activity. The following table presents the unaudited pro forma consolidated results (in thousands):


	Years Ended December 31,
	2015		2014		2013
Pro forma combined revenues	$	490,451	$	364,447	$	179,561
Pro forma combined net income (loss)	$	28,217	$	(57,739)	$	463,522

The pro forma adjustments reflected in the pro forma combined net income (loss) in the above table primarily represent adjustments to historical amortization of intangible assets, to historical depreciation of property, plant and equipment, and reductions to historical CBR revenues due to fair value purchase accounting adjustments to intangible assets, property, plant and equipment and deferred revenue. In addition, the pro forma combined net income (loss) includes increased interest expense due to the increase in term loan borrowings and the issuance of $500.0 million aggregate principal amount of 7.875% Senior Notes due 2023 (the “2023 Senior Notes”) in connection with the CBR acquisition. Income taxes for all periods were adjusted accordingly. This pro forma financial information is not necessarily indicative of our consolidated operating results that would have been reported had the transactions been completed as described herein, nor is such information necessarily indicative of our consolidated results for any future period.

Goodwill

In connection with the CBR acquisition, we recognized $441.1 million of goodwill, primarily due to the synergies expected from combining our operations with CBR and to deferred tax liabilities recorded on the fair value adjustments, primarily those relating to intangible assets and deferred revenue. In connection with the Lumara Health acquisition, we recognized $198.1 million of goodwill, primarily due to the net deferred tax liabilities recorded on the fair value adjustments to Lumara Health’s inventories and identifiable intangible asset. The $639.2 million of goodwill resulting from the CBR and Lumara Health acquisitions is not deductible for income tax purposes.

MuGard License Agreement

In June 2013, we entered into the MuGard License Agreement with Abeona, under which we obtained an exclusive, royalty‑bearing license, with the right to grant sublicenses, to certain intellectual property rights, including know‑how, patents and trademarks, to use, import, offer for sale, sell, manufacture and commercialize MuGard in the U.S. and its territories (the “U.S. Territory”).

In consideration for the license, we paid Abeona an upfront payment of $3.3 million on June 6, 2013 (the “MuGard License Date”). We are required to pay royalties to Abeona on future net sales of MuGard until the later of (a) the expiration of the licensed patents or (b) the tenth anniversary of the first commercial sale of MuGard under the MuGard License Agreement in the U.S. Territory (“the “MuGard Royalty Term”). These tiered, double-digit royalty rates decrease for any part of the MuGard Royalty Term occurring after the expiration of the licensed patents and are subject to off-set against certain of our expenses. After the expiration of the MuGard Royalty Term, the license shall become a fully paid-up, royalty-free and perpetual license in the U.S. Territory.

We did not assume any pre-existing liabilities related to the MuGard business, contingent or otherwise, arising prior to the MuGard License Date. We accounted for the acquisition of the MuGard Rights as a business combination under the acquisition method of accounting since we acquired the U.S. commercial rights for MuGard and inventory, and obtained access to certain related regulatory assets and product supply, employees and other assets, including certain patent and trademark rights, contracts, and related books and records, held by Abeona, which are exclusively related to MuGard. In addition, during the term of the MuGard License Agreement, we will have control over sales, distribution and marketing of MuGard in the U.S. as Abeona has assigned to us all of its right, title and interest in MuGard-related internet and social media outlets and other sales, marketing and promotional materials currently owned or controlled by Abeona. Abeona will no longer commercialize, market, promote, sell or make public communications relating to MuGard in the U.S Territory, except as may be agreed to by us. Abeona has also agreed to not, directly or indirectly, research, develop, market, sell or commercialize any medical devices that directly compete with MuGard for the treatment of any diseases or conditions of the oropharyngeal cavity in the U.S. Territory.

The following table summarizes the total consideration for the MuGard Rights (in thousands):


	Total Acquisition
	Date Fair Value
Cash	$	3,434
Acquisition-related contingent consideration		13,700
Total consideration	$	17,134

During 2013, we completed the valuation for the acquisition of the MuGard Rights and determined the fair value of the contingent consideration and the intangible asset as of the MuGard License Date to be $13.7 million and $16.9 million, respectively. The acquisition date fair value of the contingent consideration was determined based on various market factors, including an analysis of estimated sales and using a discount rate of approximately 15%.

The following table summarizes the fair values of the assets acquired related to the business combination as of the MuGard License Date (in thousands):


	Total Acquisition
	Date Fair Value
MuGard intangible asset	$	16,893
Inventory		241
Total identifiable assets acquired	$	17,134

We incurred approximately $0.8 million of acquisition-related costs in 2013, which were primarily related to professional and legal fees.

Pro forma results of operations would not be materially different as a result of the acquisition of the MuGard Rights and therefore are not presented.